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3 years into the crisis, the general state of the economy is approaching 1970's stagflation conditions, actually.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 05:54:53 AM EST
[ Parent ]
but that's my point - it's not obvious to me yet that the devaluation/inflation route is any less painful than the austerity route.

There was a bubble, ie a perception of more wealth than there really was, and there needs to be a downwards adjustment of sorts. The questions are how big it is, and who bears the pain.

My point is to say that the bigger problem is the allocation of pain rather than the size of the crash. Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.

I don't think there's anything today that cannot be solved by high marginal tax rates and severe re-regulation (and breakup) of banks.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Apr 13th, 2011 at 07:29:24 AM EST
[ Parent ]
Jerome a Paris:

My point is to say that the bigger problem is the allocation of pain rather than the size of the crash. Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.

I don't think there's anything today that cannot be solved by high marginal tax rates and severe re-regulation (and breakup) of banks.

How would this solve the problems of Portugal?

As I see it, the currency union means that the peripheral countries need transfers and an industrial policy or we are eventually facing the depopulation of the periphery.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Wed Apr 13th, 2011 at 08:06:09 AM EST
[ Parent ]
The current situation is bizarre - explosively incoherent banker-politics pretending to be sound and wise economic management.

But the problem isn't just the fact that the policies make no sense - it's that there's no group or organisation that can offer a solid counterpunch against them.

Effectively the Bundesbank and "investors" decide policy, and governments exist solely to implement it.

If the policy happens to be suicidally inappropriate for a given government, that government can always be replaced.

However, governments are not allowed to set policy for banks and investors. Even minor restrictions, like the ones being proposed in the UK, are met with outraged howls and self-righteous huffing.

It's obvious that nation states are no longer able to act as sovereign entities. Even when pols understand what's happening, and don't choose to be complicit with it, there's very little individual governments can do.

The only workable solution is an EU-wide - preferably an international - political front to oppose investor domination.

This can't take the form of a single party or wing, but has to include senior (dissenting) figures from across the region working together and coordinating responses and actions.

This isn't likely to happen - I'm not holding my breath for it. But unfortunately I think it may be the only way to stop the neo-lib thugs before they break something permanently.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Apr 13th, 2011 at 08:33:52 AM EST
[ Parent ]
ThatBritGuy:
It's obvious that nation states are no longer able to act as sovereign entities. Even when pols understand what's happening, and don't choose to be complicit with it, there's very little individual governments can do.
Spain's Zapatero gets Chinese investment pledges | Reuters
China will continue to buy Spanish debt and will help to fund a restructuring of its savings banks, a Spanish government source said after Chinese Premier Wen Jiabao met Spanish Prime Minister Jose Luis Rodriguez Zapatero in Beijing.
The figure being thrown about in the Spanish press is €9bn to recapitalize the Cajas and an unspecified amount of debt. Wen Jiabao is quoted calling Spain "China's best friend in Europe".

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:44:10 AM EST
[ Parent ]
to be China's best bitch in Europe?

['s Macho Moment of the Day™ Technology]

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed Apr 13th, 2011 at 12:53:15 PM EST
[ Parent ]
El mayor fondo chino niega que vaya a invertir 9.000 millones en las cajas · ELPAÍS.comChina's biggest fund denies it will invest €9bn in [Spain's] Cajas - ElPais.com
El Ejecutivo español admite que se equivocó de fondo y que no se habló de ninguna cantidad, aunque mantiene que Pekín está interesado en el sector.- Hu Jintao: "La visita de Zapatero es un éxito"The Spanish government admits they spoke of the wrong fund and that there was no talk of amounts, though they maintain that Pekin is interested in the sector. Hu Jintao: "ZP's visit is a success".


Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 06:13:41 AM EST
[ Parent ]
Yes, political capture is the basic problem. No matter what a crisis consist of, the recepy is the same - take from the poor and give to the rich. Which leads to new crisises, more shock therapy and so on.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Wed Apr 13th, 2011 at 02:44:01 PM EST
[ Parent ]
ThatBritGuy:
senior (dissenting) figures from across the region working together

a choir in the wilderness?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Apr 13th, 2011 at 08:02:26 PM EST
[ Parent ]
The bigger problem is the economic illiteracy of the EU economic establishment and the institutional rules of the Eurozone.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:19:37 AM EST
[ Parent ]
Jerome a Paris:
Asset owners, in particular financial asset owners, are protected at the expense of workers. Austerity ensures that, but it can certainly also happen under devaluation/inflation, depending on which policies go along.
Debt Asset owners are not protected by inflation. That's the whole origin of the Bundesbank policy, Austrian economics and Goldbuggery in general.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins. Other than that, inflation is bad for the wealthy.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Wed Apr 13th, 2011 at 08:24:25 AM EST
[ Parent ]
Debt Asset owners are not protected by inflation.

Potentially including all pensioners.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins.

Except when imported raw materials make up a high part of their production costs.

Additionally, when inflation is chiefly inflation of imported food and heating fuel, that will disproportionately hit the poor.

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Apr 13th, 2011 at 10:02:14 AM EST
[ Parent ]
Debt Asset owners are not protected by inflation.

Potentially including all pensioners.

But that is an argument against privatising pensions, not an argument against inflation.

Inflation helps the owners of productive assets if higher prices allow them to pocket higher margins.

Except when imported raw materials make up a high part of their production costs.

Additionally, when inflation is chiefly inflation of imported food and heating fuel, that will disproportionately hit the poor.

True. But imported inflation is not amenable to fiscal or interest rate policy. The only long-term way to deal with imported inflation is import substitution or reduced dependence on the goods in question. And the short-term solution to imported inflation - interest rate hikes or austerity in order to improve (or defend) your terms of trade with RoW - works at cross purposes with the industrial policy required to reduce your import dependencies.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 10:29:28 AM EST
[ Parent ]
But that is an argument against privatising pensions

What is the relationship there? Pensions weren't yet privatised when this happened to pensioners in ex-communist states. Methinks this has more to do with the model of retirement funds as a pot of lifetime savings, whether private or state-run.

And the short-term solution to imported inflation - interest rate hikes or austerity in order to improve (or defend) your terms of trade with RoW - works at cross purposes with the industrial policy required to reduce your import dependencies.

Does that apply to basic food items and heating fuel?

Let me add a third problem I see with the inflation narrative: on the side of wealthy people. What inflation eats away at is the value of their assets. If they can decouple at least a good part of their income from asset prices and keep their assets (bee it gold or stocks in companies not going bust or means of production), then they don't loose anything physical, and the value of those assets will rebound in the next rally. I imagine this is not something that can't be countered with some nice taxes on wealth, but don't you agree that the rich don't automatically suffer the inflation route?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Wed Apr 13th, 2011 at 05:26:53 PM EST
[ Parent ]
In the US we have "defined benefit" and "defined contribution" plans. One difference is that the payout of the "defined contribution" plans explicitly depends on how well the economy and the investment decisions of the provider work out, whereas the burden of coming up with the benefit remains with the provider in defined benefit plans. State sponsored pensions funds, such as CALPERS provide what they can from their investments and the State of California remains on the hook for the balance, it what CALPERS provides doesn't meet the definition.
Defined contribution plans seem to work out better for the provider than for the beneficiary. That is why there is such pressure for companies that provide "defined benefit" retirement plans to label them "unsustainable" and convert them to "defined contribution" plans. The state plans are likely to be "re-defined" benefits when all is said and done. Voters getting $20,000/yr or less from Social Security are not likely to be terribly sympathetic to retired officials getting >$75,000/yr from CALPERS.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 13th, 2011 at 05:56:32 PM EST
[ Parent ]
What is the relationship there? Pensions weren't yet privatised when this happened to pensioners in ex-communist states. Methinks this has more to do with the model of retirement funds as a pot of lifetime savings, whether private or state-run.

Well, yes, the point of retaining state control of the pensions is that you can index them, precisely because the state works on cash rather than accrual accounting.

Does that apply to basic food items and heating fuel?

Suppose you want to actively reduce your import dependency on fuel. This requires you to, in the aggregate, invest more in your housing stock and industrial plant than you would under a business-as-usual scenario. Both contractionary fiscal policy and contractionary interest rate policy will impair that investment. I suppose that in principle you might reconcile overall contractionary policy with greater targeted investment if you go all-out command economy in the relevant sectors, but as long as you want to retain a monetary economy with fungible money it's hard to see how that would work in practise.

Let me add a third problem I see with the inflation narrative: on the side of wealthy people. What inflation eats away at is the value of their assets. If they can decouple at least a good part of their income from asset prices and keep their assets (bee it gold or stocks in companies not going bust or means of production), then they don't loose anything physical, and the value of those assets will rebound in the next rally. I imagine this is not something that can't be countered with some nice taxes on wealth, but don't you agree that the rich don't automatically suffer the inflation route?

Inflation is not a tax on wealth, it's a tax on lazy money. So a rich person won't automatically suffer under inflation, and a poor person won't automatically gain.

More precisely, inflation is a tax on net creditors and those wage-earners and benefits claimants that are in a weaker political position than they were when their wages and benefits were originally instituted (due to the high downward rigidity of nominal wages and benefits). It is a subsidy to net debtors and employers who are in a stronger bargaining position than they used to be. That makes it a net loss for the financial sector, lazy money and weakly organised labour, and a net gain for the industrial sector and homeowners.

Devaluation or depreciation is a tax on imports and a subsidy for exports. Overall that translates to a net benefit for people associated with primary or manufacturing industries and a net loss for people associated with the financial or service sectors.

Contractionary interest rate policy is a tax on the future and a subsidy to the present. Homeowners and the industrial sector lose, because they are capital intensive; lazy money and the financial sector win because they are capital-extensive.

Contractionary fiscal policies are a tax on labour and the industrial sector, both of which are sensitive to the state of demand.

Further, economic activity is impaired by double-digit inflation rates, appreciation of the currency, contractionary interest rate policy and contractionary fiscal policy, and boosted by depreciation of the currency and expansionary interest rate and fiscal policy (note that there is no documented gain from further lowering inflation once you've eliminated the disruption caused by impairment of the ability of the currency to function as money).

As you will see, there is no perfect overlap between any of these groups and "the wealthy" or "the poor." But it is often possible to construct combinations that will favour the groups you want to favour. A combination of expansionary fiscal policy and moderate inflation favours labour and the industrial sector while it penalises the financial sector, lazy money and benefit claimants that lack adequate political power to defend the real value of their claims. Conversely, a combination of a strong currency, low inflation and contractionary interest rates favours lazy money and the financial sector, at the expense of homeowners, the industrial sector and overall economic performance (incidentally, I think that is as good an explanation as any for why this policy combination is so popular with The Serious People).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Apr 13th, 2011 at 06:18:01 PM EST
[ Parent ]
Diary.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Thu Apr 14th, 2011 at 03:59:30 AM EST
[ Parent ]
Otherwise I'll just post it myself.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:31:00 AM EST
[ Parent ]
Done.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:53:40 PM EST
[ Parent ]
The fact that social insurance pensions are always only a redistribution of current production among current consumers means that inflation makes social insurance look more effective than financial savings for retirement funding ~ and that is also bad for those who get a slice of financial savings for retirement, but no slice of social insurance pensions.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Apr 13th, 2011 at 02:06:28 PM EST
[ Parent ]

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